Investing
“What’s past is prologue,” Shakespeare wrote in The Tempest. This is good advice for stock market investors. A look back at recessions over the last 50 years shows that the market can reset down sharply and quickly. In some cases, the drop was well over 30%.
Periods of recession naturally hit stock prices. Consumer demand causes a drop in GDP and lowers business capital investments. Access to loans gets harder, and company EPS drops. Consumer spending accounts for about 75% of GDP.
During the recession of the early 1990s, the S&P dropped 21% and the Nasdaq by 32%. In 2001, the S&P fell by over 25%. The dot-com crash in early 2000 forced the Nasdaq down as much as 50%, and it took years for the index to recover.
The drop during the Great Recession is a poor indicator because it was the most significant financial catastrophe since the Great Depression and is not likely to be repeated. The S&P and Nasdaq dropped more than 50% from their peaks at the start of the pandemic.
The COVID-19-driven drop in 2020 is also not a good indication because there has not been a widespread deadly disease since the Spanish flu pandemics of 1918 and 1919.
The lesson is that even when the COVID and Great Recession stock market plunges are backed out, recessions cripple the stock market.
The market, measured as the S&P, is down only to 5,580 from its late December peak of 6,085. That is less than 10%. A correction based on historical figures will be closer to 25%, which means the S&P would drop to 4,560.
The stock market will get killed if there is a recession in the last half of the year.
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